In April 2024 the city of Quincy in Massachusetts issued the first blockchain-based bond in the US with the aim to democratise debt sales for its citizens. Eric Mason, chief financial officer for Quincy, explains the city is building a new school using the technology. And blockchain could eventually allow somebody dropping off their child to see that they are earning interest from the bond which financed the building.
“Mayor Thomas Koch said the first goal was to prove the ground through the technology — you have to paddle a little while before you can swim in the ocean,” Mason says. “Our long-term goal is to use blockchain to democratise debt.”
The process started about a year before the issue when Ian Cain, city council president, read about Siemens, the German industrial company, selling a digital bond, and the district of Lugano in Switzerland issuing a bond on blockchain. He then asked if Quincy could do the same. City officials met with financial advisers at Hilltop Securities for a brainstorming session and reviewed everything, from Quincy generating its own token to pure decentralisation.
“We found that the regulatory process really drove risk,” says Mason. “As CFO for the city, I’m not allowed to increase risk, so we wanted to mimic the safest environment while still getting the benefits of blockchain.”
Quincy’s $10mn tax-exempt bonds were sold through JPMorgan’s Digital Debt Service, an application built on Kinexys Digital Assets (previously Onyx), the bank’s private and permissioned blockchain-based platform.
The bank was the sole underwriter and in a statement said that this was the first transaction in which blockchain has been used to issue, settle and record ownership in live municipal securities. Quincy received proceeds in a delivery-versus-payment settlement in near real-time without needing to use an issuing and paying agent.
JPMorgan was part of the syndicate when Quincy sold a $475mn pension obligation bond to erase its unfunded pension liability about two years before the blockchain bond. Mason says: “We had a very friendly, positive relationship with JPMorgan and they have always been good community actors with branches in Quincy. We were all new to this in the US and everyone involved, including JPMorgan, reduced their costs, as this was going to be a lot of work on the regulatory side.”
Strong partners
As the city explored its banking relationships, Mason says it became apparent that Kinexys Digital Assets had the right mixture of technological innovation, security and experience. “When I first saw Onyx, I felt like I was looking 30 years into the future,” he adds.
Mason describes JPMorgan as “awesome partners”, especially as the bank told the city, as soon as allowable, when investors were getting on board. For example, in December 2024, BlackRock bought the Quincy bond for a municipal bond exchange traded fund.
“JPMorgan did not have to tell us that BlackRock was investing, but I was really appreciative,” adds Mason.
Municipal debt liquidity is anaemic in the secondary market, but Mason argues that blockchain makes it less painful to trade. He says: “That is why it was so important when BlackRock bought the bonds in the secondary market. Once the liquidity pool begins to expand, liquidity risk reduces, which means lower interest rates.”
In addition, smart contracts can be programmed on a blockchain to automate post-execution trade management, including coupon payments and redemption events. It was previously nerve-racking to send payments, according to Mason, as some wires have experienced hold-ups.
Looking back, Mason describes the process as simpler than he imagined. He says: “At the beginning it seems like an impossible mountain to climb, but once you take it step by step, we could figure this out. We had a good team, great attorneys, financial minds and everybody was on the same page, which made it a lot easier. Many hands make light work.”
Gathering interest
The disadvantage was having to “cut the path in the snow” as the first US entity to issue a blockchain bond. Since the sale, Mason has had calls with other cities in Massachusetts, and across the US and Canada, who are attracted to the low cost of issuing blockchain bonds. Many investors have also been in contact as digital assets do not usually pay interest. Mason says: “I think the tax-free interest on municipal blockchain bonds is going to be a real benefit in the long run, together with fractionalisation.”
Quincy’s bond issuance programme depends on the city’s major projects. The city typically issues about $80mn in long-term debt and between $200mn and $250mn in short-term debt to improve its downtown district. The city issues debt quarterly, rather than annually, and Mason says that being a frequent issuer paid dividends throughout the blockchain sale. Quincy would be confident in issuing in larger size on the blockchain, especially after receiving reassurance from the BlackRock purchase.
“We’re not done innovating and we are moving towards democratising this even more,” says Mason. “We really want to be able to push this to the retail side and that’s going to face similar regulatory challenges.”